Deregul;Ation Of The Electrical Industry

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Deregul;Ation Of The Electrical Industry

Deregulation of the Electrical Industry
The roots of modern day regulation can be traced all the way back to the
late 1800's and found in the form of antitrust. By the beginning of the 20th
century, the U.S. government had formed the interstate Commerce
Commission to regulate the railroad industry, and shortly thereafter, many
other regulatory commissions were founded in the transportation,
communication, and securities fields. The main goal of these regulatory
commissions was to create a reasonable rate structure that would be
appealing to both producers and consumers.
While this system has worked for many years, it has recently come under
heavy criticism, with many people pushing for open competition among
electric power producers. Although once believed to be an impossible
proposal, competition among electric power producers is finally a reality in
a few areas. Massachusetts is just one state where legislation implemented
to create competition among electric power producers is not only favored
by the people of the state, but has also provided significant rate reductions
as well.
The attempt at regulating price in the electric industry is a troublesome
one. The objective is not only to minimize the cost to consumers, but also
to create a rate structure that will entice the electric company to remain in
the industry. The regulatory commission wants the electric company to
have a reason to innovate so that they will be able to provide cheaper
power in the future. However, if the commission captures all gains from
innovation in the form of lower prices, then the electric company has no
incentive to undertake any type of innovation. Therefore, a compromise
must be reached which would provide adequate incentives for firms to
undertake cost-reducing actions while at the same time ensuring that the
price for consumers is not exorbitant.
The term regulation refers to government controlled restrictions on firm
decisions over price, quantity, and entry and exit. Each factor of an
industry must be regulated for producers and consumers to truly benefit.
The control of price does not mean setting one fixed price, but rather
entails the creation of a price structure for purchasing electricity during
peak and non-peak times. The control of quantity refers to the
government's attempt to control the amount produced or in this case the
amount of electricity produced. For example, in the electric industry, it
does not make sense to have a lot of small power plants produce
electricity. However, at the same time one company can not be allowed to
monopolize the industry and set prices at its own discretion. Another factor
in this problem is the control of entry and exit in the electric industry. By
controlling who can enter the industry, the government can control who
produces the electricity and how much of it they produce.
However, the effectiveness of regulation has begun to be questioned, and
created the evolution of a more competitive market. Ever since the Public
Utility Act of 1935, which in turn created the Federal Power Commission,
the role of electric utility regulation and its effectiveness has been
questioned. Since that act was passed into legislation, the question has
always remained: has electric regulation made a difference? Major studies
done throughout the 20th century found conflicting results. A study
published in 1962 and conducted by Stigler and Friedland compared the
price of electricity in states with regulation to the price in states without
regulation. However, at the time all states had electric regulation, so
Stigler and Friedland had to go back to the 1920's and 1930's to find states
without regulation
Their finding was as expected. In 1922, the average price of electricity was
2.44 cents per kilowatt-hour in states with regulation. However, in states
without regulation, the average price increased to 3.87 cents per kilowatt-
hour. While many would say that prices could vary for reasons other than
regulation, Stigler and Friedland controlled the analysis of other variables
and found that no significant difference in price existed. Other critics felt
that this study was done in a time when regulation was just getting started,
and that regulators in the present day are more effective.
Two other studies which found different results were those conducted by
Meyer and Leland and another done

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